IN RE; REVEL AC INC.

A tenant with a rejected lease retains ‘recoupment’ rights in addition to the protections in Section 365(h).

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Case Type:
Business
Case Status:
Affirmed
Citation:
Case No. 17-3607 (UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT) (3rd Circuit, Nov 30,2018) Published
Tag(s):
Ruling:
IDEA Boardwalk may reduce its rent obligations by certain amounts entitled to recoupment under the Lease, (1) because they “fall within the ambit of rights preserved under Code § 365(h)(1)(A)(ii); and (2) based on the equitable doctrine of recoupment. The Court also clarified that equitable recoupment applies to rent and recoupment amounts under the Lease regardless whether they arose before or after Revel filed its bankruptcy petition and regardless whether they arose before or after Revel rejected the Lease.
Procedural context:
Ruling by the Bankruptcy Court for the District of New Jersey appealed to the United States District Court for the District of New Jersey, and then appealed to the Third Circuit Court of Appeals, which affirmed the Bankruptcy Court and District Court.
Facts:
Tenant, IDEA Boardwalk, filed an adversary proceeding in the Bankruptcy Court for the District of New Jersey seeking to protect its right to continue operating on landlord/Debtor, Revel's, casino premises under a long-term lease (the "Lease"). Thereafter, Polo North Country Club acquired Revel's assets via a section 363 sale (the "Sale"). The purchase agreement underlying the Sale (the "Agreement") provided that Polo would purchase Revel’s assets free and clear of all liabilities except for those listed in the Agreement. Of relevance here, it stated that Polo North's only surviving liability with respect to the Lease would be a potential liability to IDEA Boardwalk for an administrative expense claim up to a specified maximum amount. The Agreement also stated that Polo would acquire certain legal claims Revel may have against IDEA Boardwalk with respect to the Lease, which the parties understand to include any rent payments that IDEA Boardwalk may still owe under the Lease. The Agreement, however, also preserved Idea Boardwalk's rights, including of setoff and recoupment, claims and defenses of IDEA Boardwalk related to the adversary proceeding, and rights pursuant to section 365(h) of the Bankruptcy Code, all of which would remain in effect assuming Revel rejected the Lease. After the Sale, the Bankruptcy Court granted Revel's long standing motion to reject the Lease, and, in turn, IDEA Boardwalk filed a notice of its election to retain its rights as a tenant under Bankruptcy Code section 365(h), as permitted under the order approving the Sale. IDEA Boardwalk also asked the Bankruptcy Court to clarify its rights as a tenant, which was addressed by omnibus order. The omnibus order, however, did not address IDEA Boardwalk's recoupment rights. IDEA Boardwalk thereafter filed a motion for summary judgment on one of its pending claims in the adversary proceeding (now against Polo North, which had stepped into Revel's shoes by virtue of the Sale), including asserting its recoupment rights. The Bankruptcy Court granted in part IDEA Boardwalk's summary judgment motion, holding that IDEA Boardwalk may reduce its rent obligations by certain amounts entitled to recoupment under the Lease based on section 365(h) of the Bankruptcy Code and the equitable doctrine of recoupment. Polo North appealed to the District Court the Bankruptcy Court’s grant of summary judgment, and the District Court affirmed on the same grounds. Polo then appealed to the Third Circuit Court of Appeals, which affirmed the Bankruptcy Court and District Court rulings.
Judge(s):
AMBRO, CHAGARES, and GREENAWAY, JR., Circuit Judges

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